Why trading strategy fails but is successful in historical backtesting? No walk forward theory or exchange simulator testing

(Last Updated On: January 9, 2013)

Why trading strategy fails  but is successful in historical backtesting? No walk forward theory or exchange simulator testing

A great question from visitor:


> Hello Bryan,
> I was on the demo yesterday and had a couple of questions: Have you
> ever traded a live account using HFT models on the sub minute interval
> and how successful was that experience? If so, do you have a strategy
> for quantifying limit order fills or achieving fills that are reliable
> enough to use in your model? I’ve found that it’s pretty easy to
> create an very rosy equity curve in theory but in reality you get
> filled much more often on the losing trades than on the winning trades
> and the model is nearly useless at predicting which ones you will
> actually get filled since that is an unknown variable. I’ve tried
> using assumptions such as X trades at price, time at price but the the
> only one that is reliable is if the price trades above or below your
> price which will destroy the equity curve.

–> I have not done the live trading YET but doing lots of paper trading. As you know backtesting gives something that has totally different results. I am reading the book from Robert Pardo about walk forward testing to minimize what you mention. I have other theories that may work including running strategies in simulated exchanges which can be done with the tools I have at my disposal. It comes down to a time thing but these items will be considered well before trading with live money.
> Curious to know your thoughts about this as this seems to be the main
> hurdle in my opinion and this is where the big boys probably have is
> beat since they have much more data processing power, faster
> connections, better relationships with the exchanges, and can front
> run the winning trades before we can get in.
–> See above but it seems many forget to do walk forward testing or even running a strategy through an exchange simulator. As said, I got tools that do this but it just unfortunately on the back burner right now.


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